GloBE Rules Series

ITQ G-

056

April 28, 2023

Question

An MNE Group which is "within scope" of the GloBE rules, has this simplified structure:

UPE (located in jurisdiction U) owns 100% of the shares in ACo (located in jurisdiction A)
ACo owns 100% of the shares in each of 2 sister subsidiaries: BCo (located in jurisdiction B) and CCo (located in jurisdiction C)

CCo is the only Constituent Entity located in jurisdiction C.

BCo manufactures goods and sells them to CCo, which distributes the goods to third party customers in jurisdiction C.

In Year 1, CCo has these (prima facie) financial numbers (before considering any TP adjustments - see below):

FANIL: 1,000
Purchases from BCo: 400
Adjusted Covered Taxes: 120

In Year 2, the jurisdiction C tax authorities claim that the purchases from BCo exceed the arm's length price. They therefore make a primary transfer pricing adjustment for Year 1: CCo's deductions for purchases from BCo are reduced by 100. The jurisdiction C corporate income tax rate is 15%.

The jurisdiction C tax authorities also make a secondary transfer pricing adjustment for Year 1: the "extra" cash of 100 which has been paid by CCo to BCo is deemed to be a dividend paid by CCo to ACo, followed by a deemed capital contribution by ACo to BCo. Dividend withholding tax of 20% is imposed on the deemed dividend. The withholding tax is imposed on ACo, but CCo has a collection obligation - therefore, the jurisdiction C tax authorities collect the withholding tax from CCo.

CCo accepts that both of these adjustments are appropriate.

In Year 2, CCo has these (prima facie) financial numbers (before considering any TP adjustments):

FANIL: 1,200
Purchases from BCo: 450
Adjusted Covered Taxes: 200

CCo expects that there will be no transfer pricing adjustment in Year 2 in regard to its purchases from BCo, because the intercompany price was changed in Year 2 in accordance with the Year 1 adjustment.

Based on this limited information, what will be the amount of Jurisdictional Top-up Tax (if any) for jurisdiction C in each of Year 1 and Year 2?

Please assume that (1) there are no adjustments in computing CCo's GloBE Income, except those which follow from the facts stated above; and (2) CCo has no Substance-based Income Exclusion in either Year 1 or Year 2.

Answer

Year 1

The primary TP adjustment will be reflected in CCo's GloBE Income in Year 2, not in Year 1: see para. 99 of Comm on Art. 3.2.3, and also see Art. 4.6.1. The additional jurisdiction C income tax (i.e., 100 x 15% = 15) will be reflected in CCo’s Adjusted Covered Taxes in Year 2, not Year 1: Art. 4.6.1.

GloBE Income: 1,000 + 120 (assuming Adjusted Covered Taxes = Net Taxes Expense) = 1,120

Adjusted Covered Taxes: 120

ETR: 120 / 1,120 = 10.7143%

Top-up Tax Percentage: 4.2857%

Top-up Tax: 4.2857% x 1,120 = 47.9998

Year 2

GloBE Income: 1,200 + 200 (assuming prima facie Adjusted Covered Taxes = Net Taxes Expense) + 100 (Art. 3.2.3 adjustment, caused by primary TP adjustment for Year 1) = 1,500

Adjusted Covered Taxes: 200 + 15 (jurisdiction C tax increase, caused by primary TP adjustment for Year 1) + 20 (Art. 4.3.2(e): see below) = 235

ETR: 235 / 1,500 = 15.6667%

Top-up Tax: nil

The jurisdiction C dividend withholding tax of 20, caused by the secondary TP adjustment, probably qualifies as a Covered Tax on a deemed distribution: see AG, section 2.6. If so, and assuming the tax is reflected in ACo's financial accounts, Art. 4.3.2(e) will allocate the Covered Tax to CCo. The question arises as to whether this tax should be added to CCo's Adjusted Covered Taxes in Year 1 or Year 2. As it is an increase in Covered Taxes, I think that Art. 4.6.1 probably requires it to be added to CCo's Adjusted Covered Taxes in Year 2.

Do you agree?

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